Generally, there are two main ways for forex companies to manage their clients’ trades: either you pass trades directly to liquidity providers and simply earn a small portion of the spread, or you profit from your clients’ trades, since most traders ultimately lose more than they gain.
Benefits of the Straight-Through Processing (A-BOOK) Model
Straight-Through Processing (STP), also known as the A-Book forex brokerage model, is the simpler of the two options. With STP, clients trade through your forex platform, and these positions are sent directly to the liquidity providers you partner with.Each liquidity provider offers their best available price for the instrument, and the trader’s order is filled by the liquidity provider with the lowest spread—the difference between the bid and ask prices.In return for providing traders with direct market access, brokers charge traders a small portion of the spread, a commission per trade, or a combination of both.
Benefits of the No-Dealer Model (B-BOOK)
In the no-dealer model, or B-BOOK, brokers play a more active role in the market by taking positions opposite to those of their traders.This allows for greater profits than A-BOOK trading, as the broker captures nearly all of the profits from the trader’s positions rather than just a small commission. This strategy is very popular, according to a leading forex industry report:“Over a relatively long period, the percentage of traders who lose money ranges from 80 to 95 percent.” However, if you place the wrong trade, you run the risk of losing money.The B-Book model requires more technical knowledge, and you must be wary of over-leveraged trades and scalping; however, you can attract more traders by offering very low spreads, as your primary source of profit comes from taking the opposite side of traders’ positions.
Hybrid Forex Brokerage Model
Many successful brokers leverage the inherent advantages of both A-Book and B-Book trading, combining the two models to operate their forex businesses.Some traders are wary of dealing with brokers in a no-dealing-desk model because they know that if your brokerage firm only makes a profit when traders are losing money, there is a conflict of interest.For such traders, you can offer STP trading, while providing B-Book services to those who are solely looking for the lowest spreads.
